Read the summary and the most important questions on International economics : theory & policy | Paul R. Krugman, Maurice Obstfeld, Marc J. Melitz.

• 2 World Trade: An Overview

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• What use is the gravity model?

  It can predict the value of trade between countries, based on the GDP's of both countries and the distance between the countries.

• What's service offshoring/service outsourcing?

  Service offshoring is when a country shifts certain services that can be electronically delivered to a foreign country. At the moment the share of service outsourcing in international trade as a whole is still small, but the prophecy is that is will grow bigger and bigger in the future. It may even become the most important component of world trade.

• 3 Labor Productivity and Comparative Advantage: The Ricardian Model

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• What does the following inequality tell you? (* = foreign country)

  It tells you that the home country has a comparative advantage in making cheese.

• What does absolute advantage mean?

  When one country produces a unit of a good with less labor than another country (in real terms, not relative!) we say that the first country has an absolute advantage in producing that good.

• What is the relative wage and how do you calculate it?

  Relative wage of a country's workers is the amount they are paid per hour, copared with the amount workers in another country are paid per hour.
  For example: 
  Country 1: €12 per hour
  Country 2: €4 per hour
  Than the relative wage of workers in country 1 is 3. 

• What is 'derived demand' and what's it used for?

  Derived demand is not a direct demand of consumers, but it results from the demand for goods produced with a country's labor. You can also say it's the demand for a country's labor.

  
  

  It's used to determine relative wages in a multigood economy. We use this to determine who produces what in an open economy (international trade). 

• 4 Specific Factors and Income Distribution

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• What are the main assumptions of the Ricardian model?

  - International trade is beneficial for every participating country; everybode gains from trade
  - There's only one factor of production, namely labor
  - Labor can move freely from one sector to another
  - There is no possibility in this model that individuals are hurt by trade

• What is the main difference between the Ricardian and the specific factors model?

  In the specific factors model there are more factors of production allowed than only labor as in the Ricardian model. These other factors are specific factors, meaning that they can't move freely between sectors.

• What does a production funtion tell us?

  It tells us the quantity of a product that can be produced given any input of capital and labor:
  Qc = Qc(K,Lc)

• What is the marginal product of labor?

  This is the additional output generatid by adding one more person-hour (one more unit of labor input).